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Jan.23

12:32 PM ET

Tuesday, 23 Jan 2007

Social Security "Crisis" -- Still Real Or "Nonsense?"

Posted By:Greg Levine

Topics:Retirement | Taxes | Social Security

AP
Few would argue with the White House’s Web site, when it calls the U.S. Social Security system “one of the great moral successes of the 20th century.”

But much has changed since President Franklin D. Roosevelt founded the system in 1935 – including a historically huge graying population. And that’s where the debates start.

Grover Norquist, president of Americans for Tax Reform, told CNBC’s Michelle Lee he believes “the FICA [payroll tax] crisis is now, not 25 years from now.” He says that private investment accounts -- championed by [the George W. Bush administration] – are the best solution to the so-called crisis, pointing to nations including Chile and Britain that utilize the accounts. He thundered that Democratic opponents of Republican Social Security policies constitute “a party of tax collectors” -- who dread the idea of every American being a stockholder.

Counterpoint: Dean Baker, co-director of the Center for Economic and Policy Research, joined the “Morning Call” fray to declare that, “the idea that there’s a ‘crisis’ is nonsense.” He said Norquist’s thesis of a Social Security collapse just doesn’t add up mathematically (see below) – and warned that the argument for private accounts is based on “unrealistic” stock-market assumptions.

According to the White House site, there were 16 workers to support every one Social Security recipient during the Harry S Truman administration. But today, there are a mere 3.3 workers supporting every beneficiary. And “By the time today’s youngest workers turn 65, there will only be two workers supporting each beneficiary.”

FYI: Social Security is a big source of income for elderly Americans, providing the majority of income for two-thirds of elderly beneficiaries and all of the income for 20% of them. According to the most recent report by the Trustees of Social Security, even under the cautious assumption that the U.S. economy grows at the anemic rate of 1.6% a year, the revenues into Social Security from the current level of payroll taxes will cover promised benefits for another 38 years and will be enough to finance about 70% of benefits through 2078.

The net present value of the shortfall in revenues over the next 75 years is $3.7 trillion, only about one-third of the net present value of the Bush tax cuts of 2001 and 2003 and about 0.7% of gross domestic product projected for the same period. An immediate payroll tax increase of about 2% would eliminate this gap. So would paring the Bush tax cuts of 2001 and 2003 back by less than 50%, and transferring the added revenues to Social Security. (source: BusinessWeek)

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